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# Cost Accounting Problems for Skanda, Inc.

Problem 1

Skanda, Inc. sells clothing, shoes, and accessories at a suburban location in Boston. Here is information for the year ended June 30, 2009:

Clothing Shoes Accessories
Departmental Sales \$850,000 \$320,000 \$230,000
Subtract: Departmental Costs
Variable Costs \$510,000 \$256,000 \$ 126,500
Fixed Costs 290,000 70,000 42,000
Total Costs \$800,000 \$326,000 \$168,500
Departmental Operating Income (Loss) \$ 50,000 \$ (6,000) \$ 61,500
Management is considering closing the shoe operation because of its operating loss

Required:

Assume that the Fixed Costs listed under Departmental Costs include \$105,000 of company-wide fixed costs that are not traceable to any of the individual departments. These common fixed costs have been allocated to the departments as follows: \$63,750 was allocated to the Clothing department, \$24,000 to the Shoes department, and \$17,250 to the Accessories department. Based on these new assumptions:

a. Prepare a segmented income statement for Skanda, Inc.
b. Would closing the Shoes Department improve the company's net income? Explain.

Problem 2

Skanda operates a manufacturing process that generates two joint products, ThingOne and ThingTwo. The budget forecast for the upcoming period is as follows:

Product Quantity Produced Allocated Joint Cost Allocated Joint Cost
per Unit
ThingOne 5,000 gallons \$100,000 \$20
ThingTwo 1,000 gallons 20,000 20

The selling price for ThingTwo was \$30 per gallon last period, but due to recent changes in the market, Waco forecasts that the selling price will be only \$7.50 per gallon next period. Waco's managers have determined that Waco has the following three choices:

- Sell ThingTwo for \$7.50 per gallon.
- Process ThingTwo into a different product, ThingThree. It costs an additional \$2.00 per gallon to process ThingTwo into ThingThree, but ThingThree sells for \$9.00 per gallon.
- Discard ThingTwo instead of selling it or processing it. There is no disposal cost.

Required:

What should Waco's management do? Explain your reasoning.

Problem 3

Skanda is planning to buy injection molding machinery costing \$160,000. The machinery has an expected useful life of 5 years, and it will be depreciated using the straight-line method, assuming a \$20,000 expected salvage value. Skanda requires a minimum rate of return of 8%, and they have made the following forecasts pertaining to the operation of this machinery:
Year Estimated Annual Operating Cash Inflows Estimated Annual Operating Cash Outflows Annual Depreciation
1 \$ 40,000 \$8,000 \$28,000
2 \$50,000 \$18,000 \$28,000
3 \$75,000 \$22,000 \$28,000
4 \$105,000 \$35,000 \$28,000
5 \$110,000 \$50,000 \$28,000
Assume a tax rate of 34% on all taxable income.

Required:

1. Determine the Payback Period for this proposal.
2. Determine the NPV for this proposal, assuming an 8% required rate of return.
3. Determine the IRR for this proposal.
4. Do you recommend that Skanda proceed with this proposal? Why or why not?

#### Solution Summary

This solution provides a detailed a computation of the given accounting problem.

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